Free tool
Profit margin calculator
Type in your sales and costs to see your gross margin, net margin and markup. Below it: what each number tells you, the formulas, and why margin isn't markup.
Your margins
- Gross margin
- 40%
- Gross profit R100,000
- Net margin
- 12%
- Net profit R30,000
- Markup
- 66.7%
- Gross profit on cost of sales
Of every R100 of sales, cost of sales takes R60 and overheads take R28. R12 is left as profit, before tax.
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Three numbers, three questions
Each one divides the profit by something different, so each answers a different question.
Gross profit margin
Is the work itself profitable?
(Sales − cost of sales) ÷ sales × 100
What's left of each sale to pay for overheads and profit. If it slips, look at prices, discounts and what each job really costs.
Net profit margin
Is the business profitable?
(Sales − cost of sales − overheads) ÷ sales × 100
What's left once the business has paid for itself. It's the margin that pays the tax, repays the loans and pays you.
Markup
How much did we add to cost?
(Sales − cost of sales) ÷ cost of sales × 100
Handy for setting prices from cost, as long as you don't mistake it for margin.
How to calculate profit margin: a worked example
A joinery business, made up for this example, has a month with R250,000 of sales. Materials and the team's time on the jobs cost R150,000. Rent, admin salaries, vehicles and everything else cost R70,000.
Gross profit: R100,000.
R250,000 of sales less R150,000 cost of sales.
Gross margin: 40%.
R100,000 ÷ R250,000 = 0.40, and 0.40 × 100 is 40%.
Net profit: R30,000.
R100,000 of gross profit less R70,000 of overheads, before tax.
Net margin: 12%.
R30,000 ÷ R250,000 = 0.12, or 12%.
Markup: 66.7%.
R100,000 ÷ R150,000: the same profit, divided by cost instead of sales.
Of every R100 of sales, cost of sales takes R60 and overheads take R28. R12 is left as profit, before tax.
Margin is not markup
Both start from the same rand profit. Margin divides it by the selling price; markup divides it by the cost. Mix them up and you price too low.
The pricing trap
A product costs you R100 and you want a 30% margin. Adding 30% gives a price of R130, but R30 of profit on R130 is a margin of only 23.1%.
To get a 30% margin, divide the cost by 0.70: R100 ÷ (1 − 0.30) = R142.86. That's a markup of 42.9%.
| Margin you want | Markup on cost |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 25% | 33.3% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
Before VAT or after?
If your business is VAT registered, use amounts before VAT. The VAT on your sales belongs to SARS and the VAT on your costs comes back to you, so neither is income or a cost. To take 15% VAT off an amount, divide it by 1.15: R11,500 including VAT is R10,000 before VAT.
Keep both sides the same. Sales including VAT against costs before VAT make your margin look better than it is.
Not VAT registered? Then the VAT you pay on costs is a real cost you can't claim back. Use your costs including VAT, and your sales as you invoice them.
One margin for the whole business hides the jobs that lose money.
Konzult Insight works out profit by job, client or product from your books and one more source, like quotes or sales, with a monthly meeting to act on what it shows.
From R3,500 a month, after a First Look at your books.
Track your margins in management accountsWhat a fractional CFO addsFree cash flow forecast templateBreak-even calculator
Questions about profit margins
- How do I calculate profit margin?
- Take your costs off your sales, divide what's left by sales, and multiply by 100. Sales of R250,000 with R220,000 of costs leave R30,000, and R30,000 ÷ R250,000 × 100 is a profit margin of 12%.
- What is the gross profit margin formula?
- Gross profit margin = (sales − cost of sales) ÷ sales × 100. It shows how much of each sale is left to pay for overheads and profit.
- What is the net profit margin formula?
- Net profit margin = net profit ÷ sales × 100, where net profit is sales less cost of sales and overheads. This calculator shows it before tax; your annual financial statements may also show it after tax.
- What is the difference between margin and markup?
- Both start from the same profit. Margin divides it by the selling price, markup by the cost. A product that costs R100 and sells for R150 has a markup of 50% and a margin of 33.3%.
- What goes into cost of sales?
- The costs that rise and fall with what you sell: stock, materials, labour on the jobs, delivery and sales commission. Rent, admin salaries, software and insurance are overheads: they stay much the same whatever you sell.
- What is a good profit margin?
- It depends on the industry: a wholesaler can do well on a gross margin that would sink a consultancy. Compare with your own past months and with businesses like yours, and watch the direction. A margin that slips a point a month matters more than the number itself.
- Should I use prices with or without VAT?
- Without VAT, if your business is VAT registered: divide amounts that include 15% VAT by 1.15. If you're not registered, use your costs including VAT, because you can't claim it back.
- We made a profit, so why is there no money in the bank?
- Profit counts a sale when you invoice it; the bank counts it when the client pays. Stock, slow payers, loan repayments and equipment all use cash without touching profit. A cash flow forecast shows where it's going.
Find out where your margin goes.
R3,500 once-off, about two weeks, on the reports you already have. Nothing new for your team to capture.